Some financial experts will tell you that having any type of debt is a bad thing. After all, debt reduces your net worth<\/a>, strains your cash flow and costs you extra money in interest charges.<\/p>\n Explore:\u00a0GOBankingRates\u2019 Best Credit Cards for 2023<\/a> That said, it\u2019s not always realistic to go through life paying cash for everything. And when done right, borrowing money can give you access to tools and opportunities that can actually lead to greater wealth down the road. That\u2019s where the concept of \u201cgood\u201d debt and \u201cbad\u201d debt come in. Let\u2019s take a closer look at what they mean<\/a>.<\/p>\n Bad debt is used strictly for consumption and is often a result of living above your means, according to Jason Dall\u2019Acqua, a CFP and president and advisor at Crest Wealth Advisors<\/a>.<\/p>\n Examples of bad debt include credit cards, high-interest personal loans and payday loans. Auto loans are also usually considered bad debt because vehicles quickly depreciate in value. \u201cThese loans do not provide any upside investment potential and can lead to high interest costs over time,\u201d Dall\u2019Acqua said.<\/p>\n Take Our Poll:\u00a0How Has Inflation Impacted Your Holiday Shopping Plans?<\/a><\/em><\/strong><\/p>\n Good debt, Dall\u2019Acqua explained, helps you to purchase an asset that is likely to increase in value or provide cash flow. Examples of good debt include:<\/p>\n Mortgage<\/strong>: The average person can\u2019t afford to buy a home without some financing. Over time, real estate tends to appreciate in value. It\u2019s also a key driver of generational wealth, and there are several tax breaks for homeowners. Mortgage loans can also be used to buy an investment or rental property that will provide additional cash flow and appreciation.<\/p>\n<\/li>\n Business loan: <\/strong>In order for a company to scale, business owners often need to secure financing for equipment, inventory, payroll and other major expenses. A business loan, such as an SBA loan, can be critical for spurring growth and making a business successful.<\/p>\n<\/li>\n Student loan:<\/strong> These are generally considered a good form of debt because they help borrowers gain specialized knowledge that results in landing a better job. Federal student loans, in particular, have low fixed rates and there are tax write-offs for the interest.<\/p>\n<\/li>\n Auto loan (sometimes): <\/strong>Even though an auto loan is generally considered a bad debt, there are instances when it can be beneficial. For example, if financing a moderately priced car allows you to commute to school or work when you otherwise wouldn\u2019t be able to easily get there, it may be considered good debt.<\/p>\n<\/li>\n<\/ul>\n Even though a certain type of debt may be considered good, it still comes with certain risks and costs. \u201cGood debt can often be bad debt in disguise,\u201d said Tara Unverzagt, CFP, founder and chief advisor at South Bay Financial Partners<\/a>.<\/p>\n For example, buying a house can help grow your wealth over time, but it\u2019s not guaranteed \u2014 especially in the short-term. Similarly, taking out a business loan without a solid plan for how you\u2019ll use the money can result in being overleveraged.<\/p>\n So if you do decide to borrow money, there are some steps you should take to ensure it benefits your bottom line, according to Taylor Venanzi, CFP, owner and financial planner at Activate Wealth, LLC<\/a>:<\/p>\n Always make your payments on time.<\/strong> Missing payments not only results in expensive late fees, but can harm your credit considerably.<\/p>\n<\/li>\n Set up autopay so you never forget a payment. <\/strong>Just be sure you maintain enough of a buffer in your bank account so that you don\u2019t accidentally overdraw.<\/p>\n<\/li>\n Choose fixed interest rates<\/strong> over variable interest rates. <\/strong>This will ensure that you don\u2019t have to worry about payments ballooning in rising interest rate environments.<\/p>\n<\/li>\n Refinance debt<\/strong> when it makes sense to do so. <\/strong>You\u2019ll want to crunch the numbers and see if the interest savings outweigh any closing costs.<\/p>\n<\/li>\n Maintain a debt-to-income ratio of 36% or less. <\/strong>This means that your monthly debt payments should never take up more than 36% of your gross monthly income.<\/p>\n<\/li>\n<\/ul>\n Unverzagt emphasized that debt requires a lot of thought and understanding of what results could happen. \u201cPeople like to be optimistic and only look at the bright side of the equation,\u201d she said. \u201cAnd that\u2019s fine as long as you are prepared to deal with the downside also.\u201d<\/p>\n So be sure you have a good plan when taking on debt \u2026 even if it\u2019s good.<\/p>\n More From GOBankingRates<\/em><\/strong><\/p>\n This article originally appeared on GOBankingRates.com<\/a>: The Power of Debt: Why It Isn\u2019t All Bad<\/a><\/p>\n<\/div>\n\n Prostock-Studio \/ iStock.com Some financial experts will tell you that having any type of debt is a bad thing. After all, debt reduces your net worth, strains your cash flow and costs you extra money in interest charges. Explore:\u00a0GOBankingRates\u2019 Best Credit Cards for 2023Also: 5 Things You Must Do When Your Savings Reach $50,000 That …<\/p>\n","protected":false},"author":1,"featured_media":38999,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[161],"tags":[],"_links":{"self":[{"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/posts\/38998"}],"collection":[{"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/comments?post=38998"}],"version-history":[{"count":0,"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/posts\/38998\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/media\/38999"}],"wp:attachment":[{"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/media?parent=38998"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/categories?post=38998"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/tags?post=38998"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
Also: 5 Things You Must Do When Your Savings Reach $50,000<\/a><\/strong><\/em><\/p>\nWhat Is \u2018Bad\u2019 Debt?<\/h2>\n
What Is \u2018Good\u2019 Debt?<\/h2>\n
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Prevent Good Debt From Going Bad<\/h2>\n
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The Bottom Line<\/h2>\n
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